It’s now easier than ever been to found a business. The cost of starting a simple online venture is low. This has opened up the possibility for many to become entrepreneurs, and the availability of capital also enables many new ground-breaking ideas to raise the needed funds at the early stages.
However, the cost to scale a business and to acquire the latest tech is high. This has somehow led to the belief that the first thing to do, when starting a business, is to raise capital. For many new entrepreneurs this has become the first concern, and in some cases there is even an expectation that any great idea deserves to be funded.
As many serial entrepreneurs can testify, ideas never develop according to plan. They change numerous times, get tested and adapted to customers’ needs before becoming great businesses.
New entrepreneurs often wrongly assume that:
- A great idea will certainly become a great business once customers become aware of it (whereas markets are much more complex, and of course, implementation is everything)
- You cannot create traction with customers without having the latest technology to offer (instead, your competitive advantage should go beyond just the technology – do not spend too much on product development before knowing what your customers want)
- A startup is better than a normal business (instead, fast growth will eat away your profits – it is better to first establish whether your product is scalable and whether a fast growth is necessary for your specific type of business, it depends on which market you are competing in)
The emergence of many new venture capital firms, seed funding companies and accelerators, as well as prominent business angels, has also led to the belief that getting funded is easy and that it is just a matter of following a certain process. Instead, getting creative is also part of the process: sure, there are set ways to approach investors and it is now easier than ever, but just like marketing your products to new customers involves creating a strategy, getting the attention of investors can involve creating your own unique strategy.
Raising capital at seed stage differs from the traditional way of raising capital for later stage startups or SMEs, because:
- The most important factor is you, the founder(s). Your experience, reliability, how you work together with investors and others, give a good indication of your future success. It doesn’t mean that your business or product is irrelevant, but the earlier the stage, the more they will need to trust your word and the less time they can dedicate to a due diligence.
- You don’t need an advisor. It’s important to know all the ins and outs of the fundraising process and legal documents that you will be presented, as well as which mistakes you should avoid, but this is not a process that can be completely outsourced at seed stage. If you plan to raise $100k, or actually anything under $500k, you would not be able to pay an advisor for the entire project: also, early-stage investors are unlikely to want a big chunk of the funds to go to your advisor, they want to invest in your business development. As mentioned earlier, the investor will want to speak to you, the founder (or one of the founders), and therefore a certain amount of your time will still need to be reserved for the process.
- Introductions can work well to get your email read and get the attention. It is even better if it comes from someone who has known you for longer and can vouch for your reliability. Someone who has just heard your pitch 5 minutes ago can help, but they cannot honestly promise anything about your potential, unless you have significant traction, recurring revenue and a clear path to growth.
Also, depending on your strategy, the type of funding that is suitable to you, and the type of investors, change. VCs typically look for unicorn-potential and other disruptive business models and technologies, since, due to the high failure rate of startups and the long-term return on investment, a sufficient return would not be possible otherwise. That is why many new ventures are not suitable for high-risk early-stage investors.
Other funds invest in smaller or bigger companies, whereas some concentrate in specific sectors or countries: knowing this, you can set your milestones, adapt your future fundraising strategy and in some cases also your business strategy to the type of capital available in your specific market.
It has become difficult for startups to fundraise at very early stages too. Traction and a complete proof of concept is increasingly required by investors. Funding rounds are becoming more generous, but they are also taking places at increasingly later stages. Customers are a must, and therefore doing anything possible to acquire those first few clients, even if the technology or product is imperfect, becomes your first priority as a new entrepreneur. For hardware companies, this is more complicated: however, proof of concept can be achieved through valuable partnerships and other forms of validation. Your past track record, if you started (and exited) other companies, also helps.
As the traction increases, your business model and future success becomes more and more likely. Your company becomes able to operate without you, and therefore raising capital becomes less focused on selling yourself as an entrepreneur. Your company financial strength receives more attention and the value of your company also increases. In this case, it makes sense to hire an external advisor to accompany you through the process, prepare your documents and approach investors. The investment process, the contracts involved and the due diligence process also become more complex depending on the size of the transaction and the type of investor that you are dealing with.